With new foreign remittance rules coming into force from July 1, any foreign remittances under the liberalised remittance scheme (LRS) would now attract a TCS (tax collection at source) of 20 percent instead of 5 percent earlier.
The higher tax rate would apply for travel, investment and remittances barring education expenses. But some of these expenses may be excluded when the tax payer fails to provide the proof for the same.
“The TCS on the remittance has been increased from 5 percent to 20 percent. This is a mandatory levy on all LRS remittances, for which tax credit would be available to the remitter. One cannot reduce or avoid these taxes,” says Punit Shah, Partner, Dhruva Advisors.
“The rate of 20 percent is high, but it is a way to make people accountable. Now people will send the remittance only when they are completely sure about it,” says Mumbai-based chartered accountant Chirag Chauhan.
What does the proposed rule entail?
The proposed rule stipulates that any foreign remittance would attract a TCS of 20 percent. Any remittance sent for foreign education of children, however, would continue to attract a 5 percent tax.
But what would happen when the money sent abroad is towards the payment of rent to stay in a private accommodation for an Indian who is studying in a foreign university?
“This provision for TCS does not specify the nature of expenses covered under ‘education’ or what are the documents to be maintained by the individual making the remittance. However, expenses such as boarding & lodging or other incidental expenses related to education outside India may not be considered as education expense and may attract higher TCS rate of 20 percent,” says Akhil Chandna, partner, Grant Thornton Bharat LLP.
As a result, experts believe that any expense not directly connected to education abroad may not be eligible for the lower TCS.
“It is recommended that the individual making the remittance maintains proper documentation to support the remittance made for education purposes,” adds Mr Chandna.
Remitting money earlier
Some argue that taxpayers can send the foreign remittance prior to July 1 to be used by their children to avoid paying a higher TCS.
This is advisable in the cases where sending the remittance is imperative, but can be postponed for the time being. “Since the higher rates will come into effect from July 1, one can send the money now to avoid locking up money in tax,” says CA Chirag Chauhan.
Mr Chandna echoes the similar sentiments. “If an individual is already planning to remit funds abroad for purposes other than education or medical treatment, it is advised to remit it before 1 July 2023, to avoid the high cash outflow in the form of TCS," he adds.